Day Trading Is Just a Math Business

One of the most common struggles every trader has while trading is for sure having to deal with emotions. In fact, the best suggestion you can follow is to leave out emotions from your trading activity and focus on the technical execution only. That’s why I don’t look at the P&L while being into a trade but only at the end of the day.

When it comes to removing the emotions from trading, there are plenty of contents you can find about it around the web. So, I’m not the first one telling you this. My point is, how you can effectively do it depends on you only.

Every one of us gets different feelings while doing this and there is no recipe that is valid for all. My best shot about it comes really down to analyze yourself and your habits in order to identify what’s distracting you from making the best decision in a trade.

In fact, day trading is a math business. More exactly, just a probability game. Being mindful of that can change the way you make decisions about your next trades for good. Knowing that it is all about P/L ratio and accuracy for winning in the long run is key. Once there is a positive balance between those two concepts, consistent profitability will come as a consequence.

In this one blog post, the focus is on sizing and exposure where, guess what, math is center stage. I want to give you my perspective as well as some useful tips while dealing with questions like “how much should I put into this trade?” that can define your future fortune as a trader.

Define your sizing as a simple calculation

In this one blog post, the focus is on sizing and exposure where, guess what, math is center stage. And, of course, risk management is king. Make sure each one of these steps is well established into your decision-making process:

  1. Defining the max amount of dollars that you’re risking in each trade: for example, I don’t like to risk more than $500 on each trade. It’s perfectly fine to redefine this number depending on your own risk tolerance. Moreover, you can always readjust this number while the experience grows up;
  2. Measuring the distance from your stop based purely on technical: I often like to use key indicators like VWAP (Volume Weighted Average Price) or the high or the low of previous candles. In my case, if the VWAP is 50c distant from the potential entry point, I immediately know my position can be as much as 1000 shares to respect my risk parameters (1000 shares * 50c = $500);
  3. Watching for your first target to be at least twice as distant: in this case, my distance from the target should be at least $1 away from the entry point (doubling the 50c stop distance) in order to justify the trade. Sometimes I’m also ok to take a trade with a 1.5:1 P/L ratio but I wouldn’t go for anything less than that.
  4. Adding to the winners and not to the losers: it’s always great to maintain good habits like this one. Adding to winners may get your win even bigger but the same goes for a loss when adding to a loser. Make sure you adjust your stop to the break-even point if adding size into a position because the initial calculation won’t be valid anymore (e.g. doubling your size will also double your potential loss if the initial stop triggers).

“Maybe we should teach schoolchildren probability theory and investment risk management.” -Andrew Lo

See you in chat-room!

Trade safe,

Roberto Barbaro